8 ms·

How to bet against the bitcoin megabubble

88 points by flavor8 13y ago

confluence 13y ago
This is what I've found to happen with stocks. Being short is bloody expensive, the upside isn't that big (unless you're long some underpriced insurance) and everyone is basically against you, for ages. If shorting/going long had the same upside/downside you'd have a much saner world. But that ain't the world we live in, and guys who want to go short, like me, just go into straight cash and treasuries (because strong governments have guns/monopoly on taxes) to wait it out until prices to return to sane levels. This leads to a curious selection bias where only the craziest are present in the market (the rabid masses I like to call them) and they bid up everything to insane levels, while the sane just sit it out. This leads to bubbles of much greater variance than if those who currently wait out bubbles could reasonably bet against global stupidity. Instead, I'm sitting on tons of cash while equity is overvalued throughout the world, and blowhards are plowing their life savings into computational fiat (think about it). We do live in quite the world, don't we? To societal collapse and global failure.
- brc 13y ago
  The market can stay irrational longer than you can stay solvent. I forget who said it, but it's a very accurate quote.
  - confluence 13y ago
    John Maynard Keynes.
    - deleted 13y ago
      [deleted]
- adventured 13y ago
  Puts solve the problem of the upside not being that great. They introduce a total loss potential, but you also can't lose more money than you 'invest' into the put contract. They also obviously introduce a timing element, that is arguably the most difficult variable for amateurs - it not being enough to just be right that X will fall, but that it has to fall by enough by X date as well.
iSnow 13y ago
FWIW, there's Predictious too: https://www.predictious.com/economics https://www.predictious.com/economics - they offer binary ETFs on the bitcoin price. And 796.com offers a kind of bitcoin price futures that you can use to bet on falling prices - not outright shorting, but close enough.
- patrickk 13y ago
  The problem with predictious is the same as the author identified unfortunately - the currency used is bitcoin, so if you're right and the price falls, you could still lose money. I would love if one of the major european bookies (e.g. Betfair, Bet365, William Hill, Paddypower) would let you place bets on the price at a given time in the future, in your local currency like euros. Bet365 already let you do this in major currency pairs, as do other bookies: http://imgur.com/vMnFhe9 http://imgur.com/vMnFhe9
  - notahacker 13y ago
    As I pointed out in another thread yesterday, the problem is potentially even worse than just a price fall; if Bitcoin falls sharply enough (and/or governments wade in to restrict Bitcoin use) most of these startups with a Bitcoin-based business model won't survive to pay up. I'd have thought the specialist financial spread betting firms would in theory be best-placed to be a trustworthy shorting option for Bitcoin bears.
    - patrickk 13y ago
      Yeah what you're describing is a well known phenomenon in financial markets called counterparty risk[1]. Those betting against the subprime mortgage bubble prior to 2007 for example feared that those institutions accepting their exotic CDS bets would actually go out of business when the subprime bubble popped[2], and the bets wouldn't be realised. It's a sign of immaturity of the bitcoin economy that there's no trustworthy effective bitcoin shorting options- even if you don't wish to speculate, but because you wish to hedge your exposure to bitcoin volatility (say you're a large ecommerce player, with significant bitcoin holdings- you're effectively long bitcoin - and you don't want those holdings to halve in value overnight). [1] http://www.investopedia.com/terms/c/counterpartyrisk.asp http://www.investopedia.com/terms/c/counterpartyrisk.asp [2] http://www.amazon.com/The-Big-Short-Doomsday-Machine/dp/0393338827 http://www.amazon.com/The-Big-Short-Doomsday-Machine/dp/0393...
salient 13y ago
Wouldn't this ultimately help stabilize the price of Bitcoin, in part because perhaps Bitcoin bubbles wouldn't reach such tall heights anymore, if a lot more people can bet against them? I think besides much bigger volume and liquidity (still the main reasons for stability), this is probably one of the reasons why other currencies are so stable, because there's a lot of back and forth between traders - rather than everyone buying and buying and buying, until it comes crashing down hard.
- omellet 13y ago
  Other currencies are stable because they're actively managed by central banks, there's huge liquidity, and the currencies aren't inherently deflationary. Bitcoin has none of these things going for it. It's not a currency, for the most part, it's an instrument for speculators.
  - laichzeit0 13y ago
    I'm curious as to why you (and other people) call Bitcoin a "currency"? Even on the frontpage of http://bitcoin.org/en/ http://bitcoin.org/en/ it's defined as an "innovative payment network and a new kind of money" and the word currency doesn't appear anywhere. Do you also consider a cellphone to be a "phone" in the traditional sense. Could phones browse the web, edit documents, take photos, check email, etc. 20 years ago?
    - jrochkind1 13y ago
      So what's the difference between 'money' and 'currency'? If you start thinking about what either of these words mean exactly, and then start researching it -- you'll discover that even economists aren't sure and there are several competing theories of what 'money' actually is. 'money' is the more complicated concept. If bitcoin is 'money', then whether it's 'currency' or not mostly just depends, I think, on whether you want the definition of currency to include digital certificates or only physical objects. Not a very interesting question, just a matter of definitions. Now, what 'money' is, that's an interesting question.
Choronzon 13y ago
Classical Market making is probably the safest way to profit from bitcoin as the spread is so damn high. Good luck finding a hedging instrument though.
- Choronzon 13y ago
  http://www.amazon.co.uk/Option-Trading-Volatility-Strategies-Techniques/dp/0470497106/ref=la_B001ILM86Y_1_2?s=books&ie=UTF8&qid=1386853418&sr=1-2 http://www.amazon.co.uk/Option-Trading-Volatility-Strategies... An excellent chapter about market making in here,however you would have to adjust it quite a bit for bitcoin.
- throwaway_yy2Di 13y ago
  If it's supposedly safe, highly profitable, and no one's doing it (spread's still crazy), something's very very wrong.
  - Choronzon 13y ago
    Slow transaction speeds leave you with inventory for way too long (the bane of market makers ) and as you have no correlated instruments you can't even hedge the inventory you have.
thatcherclay 13y ago
Anyone know the ratio of speculative investing versus real goods/services transactions on bitcoin? I ask because it would not surprise me if 90% of all transactions go to people buying/selling against other currencies, which just makes it a zero-sum speculative tool, and with immature market dynamics at that. Zero-sum because it does not pin itself to anything of external value - ie, consumers thinking the economy is going to do well, so they take a significant loan out (increasing demand for USD) to buy a house. Without a fundamental externality like that, I think bitcoin will always just be a novel gambling mechanism, and if we cannot figure out how to make it a legit market then a bad one at that.
- zby 13y ago
  With the eletricity costs of mining it can be actually negative-sum game.
  - deleted 13y ago
    [deleted]
- oleganza 13y ago
  Comparing investment with "real transactions" is like comparing kilograms with decibels. Anyone who holds bitcoins (you, merchant, or bitpay) is a speculative investor. Everyone has different time preference. Someone holds for short time, someone for long. But what ultimately gives Bitcoin any value is all hands willing to hold it right now, this very moment. Only "speculative investment" creates value which you can then transfer in a "real transaction". If you don't want to hold you BTC, you need a merchant, or someone else willing to hold it (yes, speculatively), so you can transfer it. Transfer only happens as a result of speculative desire to hold asset. Same with dollars. You don't buy cars and houses, but keep some cash balance in a speculation that it'd be more useful this way some day in the future. It's called "reservation demand", and only it gives money value. Otherwise money is worthless pieces of paper (or bits).
  - thatcherclay 13y ago
    Yea, I agree with you. I am trying to make a different point though - there is reserve demand in both dollars and bitcoin, but if the bulk of the pricing set for bitcoin is by transactions founded in speculation (ie, not tied to a physical good or service), then it would seem there is a very limited ability to increase value in the system (aside from new users coming into the market). A currency like USD is different - you can easily and reliably exchange USD for goods and services which increase in value independent of the currency instrument itself. That, and the fact that you can amplify demand by introducing credit, creates a different dynamic, which is why I think the ratio of liquidity created by "speculative" investments versus transactions tied to something external is an interesting indicator.
deleted 13y ago
[deleted]
dschiptsov 13y ago
I am really curious about how to bid against the event in the past.)
omarkatzen 13y ago
Shorting Bitcoins would be a terrible idea. I hate Bitcoin, and expect it to eventually crash, but if you nakedly short something and it goes up in the meantime (which BTC could) you can get whacked with margin calls and lose money even if you're right. That happened to a lot of people who shorted the Nasdaq (at, say, 3000) and tech stocks in the '90s. They were right, but they still lost their shirts.
- roc 13y ago
  It's that old line that the market can remain irrational longer than you can remain liquid. In betting against a bubble, you're not placing a bet that the underlying assets are over-valued. You're placing a bet that something will pop the bubble in the timeframe you can afford. Essentially, you're not betting against the bubble, you're betting on the pin.
  - omarkatzen 13y ago
    With put options, you're betting on a timeframe. You make a profit if the price drops below a certain level by expiration. With naked shorting, you're betting on it not getting above a certain level (the level at which you face margin calls you can't meet). It could go up 10x tomorrow and kill you.
    - this_user 13y ago
      Your description of 'naked shorting' isn't accurate. Options are derivatives based on an underlying (BTC in this case). Short selling is the process of borrowing the assets you would like to short (for a fee) from another party and selling the them effectively leaving you with a negative position. If you decide to cover your position or if the lender demands you return the loaned instruments, you will have to buy back the assets. This is the standard process of shorting and you will usually not wait to cover until you get a margin call from your broker, but do it if the trade doesn't work out. 'Naked' short selling is the same process, except you never borrow the assets in the first place. You effectively sell something that you don't have. This is possible if don't have to deliver the sold assets immediately, but it will eventually lead to a 'failure to deliver'. This practice is usually illegal and your broker won't let you engage in it.
patio11 13y ago
Counterparty risk makes this an even worse option than buying bitcoin. Consider many of the antecedent events which might cause bitcoin to implode. How many of them leave unregulated derivatives exchanges up and capable of receiving your "Assign 10,000 BTC puts at $100 to those people who are short them" notice then rounding up a million dollars of actual money to send to you? I've unfortunately wasted non-trivial time thinking about this, since if it were as reliable as shorting Zynga, I'd be as long puts as my risk tolerance can take.
- bdcs 13y ago
  You can always take out a bitcoin loan for a standard short. That has no counter-party risk (on your end). Also, Coinsetter is an US startup that will allow shorting and has a lower amount of counter-party risk, IMO.
  - tptacek 13y ago
    What makes you think Coinsetter's counterparty risk is low?
- dia80 13y ago
  There can be no options since volatility is impossibly high.. lets take an example. You buy an $850 put with the spot price at $850 and it expiries in 6 months. 90 day realized volatility has been 130% annualized so the black-scholes formula says i have to charge you $300 usd for that option. You make money if BTC is $550 or below in 6 months. Your upside is $550 if it goes to 0 and down side is $300 usd. Still want to trade?
  - tedunangst 13y ago
    I suspect you could find people willing to sell that put for less than $300. If there's no action at $300, somebody will step in at $200, or $100, or $10. Remember that Bitcoin can only go up, so there's no risk. It's like free money, you just have to be willing to accept a little less free money than the rest of market to get yours.
muyuu 13y ago
Looks like a great way to get swiped out.
pla3rhat3r 13y ago
Great article. I saw no reason to keep reading after "You bet. But it's an expensive trade. And even if you're right, you won't walk away with much, if anything." I wish more articles would be more upfront so I wouldn't have to waste time reading them.
- LogicalBorg 13y ago
  Funny! Try skipping to the concluding sentence or paragraph. Or just reading the first sentence out of each paragraph. That's how I skim the long, boring stuff.
alexeisadeski3 13y ago
There isn't a BitCoin ETF yet??
- prodigal_erik 13y ago
  Storing and guarding gold is a pain in the ass. Transaction fees for tiny positions in the entire Russell 2000 index would be prohibitive. These are the kinds of things people use ETFs to buy. Why would I want to buy into an ETF that holds BTC rather than buying BTC myself, is it easier to write options or loan into short interest that way?
  - alexeisadeski3 13y ago
    >Why would I want to buy into an ETF that holds BTC rather than buying BTC myself, is it easier to write options or loan into short interest that way? Yes it would be easier. Also, it'd be much easier to grab a BTC ETF on e*trade than to deal with the BTC exchanges.

88 points by flavor8 13y ago

This is what I've found to happen with stocks. Being short is bloody expensive, the upside isn't that big (unless you're long some underpriced insurance) and everyone is basically against you, for ages. If shorting/going long had the same upside/downside you'd have a much saner world. But that ain't the world we live in, and guys who want to go short, like me, just go into straight cash and treasuries (because strong governments have guns/monopoly on taxes) to wait it out until prices to return to sane levels. This leads to a curious selection bias where only the craziest are present in the market (the rabid masses I like to call them) and they bid up everything to insane levels, while the sane just sit it out. This leads to bubbles of much greater variance than if those who currently wait out bubbles could reasonably bet against global stupidity. Instead, I'm sitting on tons of cash while equity is overvalued throughout the world, and blowhards are plowing their life savings into computational fiat (think about it). We do live in quite the world, don't we? To societal collapse and global failure.

brc 13y ago
The market can stay irrational longer than you can stay solvent. I forget who said it, but it's a very accurate quote.
- confluence 13y ago
  John Maynard Keynes.
  - deleted 13y ago
    [deleted]
adventured 13y ago
Puts solve the problem of the upside not being that great. They introduce a total loss potential, but you also can't lose more money than you 'invest' into the put contract. They also obviously introduce a timing element, that is arguably the most difficult variable for amateurs - it not being enough to just be right that X will fall, but that it has to fall by enough by X date as well.

iSnow 13y ago

FWIW, there's Predictious too: https://www.predictious.com/economics https://www.predictious.com/economics - they offer binary ETFs on the bitcoin price. And 796.com offers a kind of bitcoin price futures that you can use to bet on falling prices - not outright shorting, but close enough.

patrickk 13y ago
The problem with predictious is the same as the author identified unfortunately - the currency used is bitcoin, so if you're right and the price falls, you could still lose money. I would love if one of the major european bookies (e.g. Betfair, Bet365, William Hill, Paddypower) would let you place bets on the price at a given time in the future, in your local currency like euros. Bet365 already let you do this in major currency pairs, as do other bookies: http://imgur.com/vMnFhe9 http://imgur.com/vMnFhe9
- notahacker 13y ago
  As I pointed out in another thread yesterday, the problem is potentially even worse than just a price fall; if Bitcoin falls sharply enough (and/or governments wade in to restrict Bitcoin use) most of these startups with a Bitcoin-based business model won't survive to pay up. I'd have thought the specialist financial spread betting firms would in theory be best-placed to be a trustworthy shorting option for Bitcoin bears.
  - patrickk 13y ago
    Yeah what you're describing is a well known phenomenon in financial markets called counterparty risk[1]. Those betting against the subprime mortgage bubble prior to 2007 for example feared that those institutions accepting their exotic CDS bets would actually go out of business when the subprime bubble popped[2], and the bets wouldn't be realised. It's a sign of immaturity of the bitcoin economy that there's no trustworthy effective bitcoin shorting options- even if you don't wish to speculate, but because you wish to hedge your exposure to bitcoin volatility (say you're a large ecommerce player, with significant bitcoin holdings- you're effectively long bitcoin - and you don't want those holdings to halve in value overnight). [1] http://www.investopedia.com/terms/c/counterpartyrisk.asp http://www.investopedia.com/terms/c/counterpartyrisk.asp [2] http://www.amazon.com/The-Big-Short-Doomsday-Machine/dp/0393338827 http://www.amazon.com/The-Big-Short-Doomsday-Machine/dp/0393...

salient 13y ago

Wouldn't this ultimately help stabilize the price of Bitcoin, in part because perhaps Bitcoin bubbles wouldn't reach such tall heights anymore, if a lot more people can bet against them? I think besides much bigger volume and liquidity (still the main reasons for stability), this is probably one of the reasons why other currencies are so stable, because there's a lot of back and forth between traders - rather than everyone buying and buying and buying, until it comes crashing down hard.

omellet 13y ago
Other currencies are stable because they're actively managed by central banks, there's huge liquidity, and the currencies aren't inherently deflationary. Bitcoin has none of these things going for it. It's not a currency, for the most part, it's an instrument for speculators.
- laichzeit0 13y ago
  I'm curious as to why you (and other people) call Bitcoin a "currency"? Even on the frontpage of http://bitcoin.org/en/ http://bitcoin.org/en/ it's defined as an "innovative payment network and a new kind of money" and the word currency doesn't appear anywhere. Do you also consider a cellphone to be a "phone" in the traditional sense. Could phones browse the web, edit documents, take photos, check email, etc. 20 years ago?
  - jrochkind1 13y ago
    So what's the difference between 'money' and 'currency'? If you start thinking about what either of these words mean exactly, and then start researching it -- you'll discover that even economists aren't sure and there are several competing theories of what 'money' actually is. 'money' is the more complicated concept. If bitcoin is 'money', then whether it's 'currency' or not mostly just depends, I think, on whether you want the definition of currency to include digital certificates or only physical objects. Not a very interesting question, just a matter of definitions. Now, what 'money' is, that's an interesting question.

Choronzon 13y ago

Classical Market making is probably the safest way to profit from bitcoin as the spread is so damn high. Good luck finding a hedging instrument though.

Choronzon 13y ago
http://www.amazon.co.uk/Option-Trading-Volatility-Strategies-Techniques/dp/0470497106/ref=la_B001ILM86Y_1_2?s=books&ie=UTF8&qid=1386853418&sr=1-2 http://www.amazon.co.uk/Option-Trading-Volatility-Strategies... An excellent chapter about market making in here,however you would have to adjust it quite a bit for bitcoin.
throwaway_yy2Di 13y ago
If it's supposedly safe, highly profitable, and no one's doing it (spread's still crazy), something's very very wrong.
- Choronzon 13y ago
  Slow transaction speeds leave you with inventory for way too long (the bane of market makers ) and as you have no correlated instruments you can't even hedge the inventory you have.

thatcherclay 13y ago

Anyone know the ratio of speculative investing versus real goods/services transactions on bitcoin? I ask because it would not surprise me if 90% of all transactions go to people buying/selling against other currencies, which just makes it a zero-sum speculative tool, and with immature market dynamics at that. Zero-sum because it does not pin itself to anything of external value - ie, consumers thinking the economy is going to do well, so they take a significant loan out (increasing demand for USD) to buy a house. Without a fundamental externality like that, I think bitcoin will always just be a novel gambling mechanism, and if we cannot figure out how to make it a legit market then a bad one at that.

zby 13y ago
With the eletricity costs of mining it can be actually negative-sum game.
- deleted 13y ago
  [deleted]
oleganza 13y ago
Comparing investment with "real transactions" is like comparing kilograms with decibels. Anyone who holds bitcoins (you, merchant, or bitpay) is a speculative investor. Everyone has different time preference. Someone holds for short time, someone for long. But what ultimately gives Bitcoin any value is all hands willing to hold it right now, this very moment. Only "speculative investment" creates value which you can then transfer in a "real transaction". If you don't want to hold you BTC, you need a merchant, or someone else willing to hold it (yes, speculatively), so you can transfer it. Transfer only happens as a result of speculative desire to hold asset. Same with dollars. You don't buy cars and houses, but keep some cash balance in a speculation that it'd be more useful this way some day in the future. It's called "reservation demand", and only it gives money value. Otherwise money is worthless pieces of paper (or bits).
- thatcherclay 13y ago
  Yea, I agree with you. I am trying to make a different point though - there is reserve demand in both dollars and bitcoin, but if the bulk of the pricing set for bitcoin is by transactions founded in speculation (ie, not tied to a physical good or service), then it would seem there is a very limited ability to increase value in the system (aside from new users coming into the market). A currency like USD is different - you can easily and reliably exchange USD for goods and services which increase in value independent of the currency instrument itself. That, and the fact that you can amplify demand by introducing credit, creates a different dynamic, which is why I think the ratio of liquidity created by "speculative" investments versus transactions tied to something external is an interesting indicator.

deleted 13y ago

[deleted]

dschiptsov 13y ago

I am really curious about how to bid against the event in the past.)

omarkatzen 13y ago

Shorting Bitcoins would be a terrible idea. I hate Bitcoin, and expect it to eventually crash, but if you nakedly short something and it goes up in the meantime (which BTC could) you can get whacked with margin calls and lose money even if you're right. That happened to a lot of people who shorted the Nasdaq (at, say, 3000) and tech stocks in the '90s. They were right, but they still lost their shirts.

roc 13y ago
It's that old line that the market can remain irrational longer than you can remain liquid. In betting against a bubble, you're not placing a bet that the underlying assets are over-valued. You're placing a bet that something will pop the bubble in the timeframe you can afford. Essentially, you're not betting against the bubble, you're betting on the pin.
- omarkatzen 13y ago
  With put options, you're betting on a timeframe. You make a profit if the price drops below a certain level by expiration. With naked shorting, you're betting on it not getting above a certain level (the level at which you face margin calls you can't meet). It could go up 10x tomorrow and kill you.
  - this_user 13y ago
    Your description of 'naked shorting' isn't accurate. Options are derivatives based on an underlying (BTC in this case). Short selling is the process of borrowing the assets you would like to short (for a fee) from another party and selling the them effectively leaving you with a negative position. If you decide to cover your position or if the lender demands you return the loaned instruments, you will have to buy back the assets. This is the standard process of shorting and you will usually not wait to cover until you get a margin call from your broker, but do it if the trade doesn't work out. 'Naked' short selling is the same process, except you never borrow the assets in the first place. You effectively sell something that you don't have. This is possible if don't have to deliver the sold assets immediately, but it will eventually lead to a 'failure to deliver'. This practice is usually illegal and your broker won't let you engage in it.

patio11 13y ago

Counterparty risk makes this an even worse option than buying bitcoin. Consider many of the antecedent events which might cause bitcoin to implode. How many of them leave unregulated derivatives exchanges up and capable of receiving your "Assign 10,000 BTC puts at $100 to those people who are short them" notice then rounding up a million dollars of actual money to send to you? I've unfortunately wasted non-trivial time thinking about this, since if it were as reliable as shorting Zynga, I'd be as long puts as my risk tolerance can take.

bdcs 13y ago
You can always take out a bitcoin loan for a standard short. That has no counter-party risk (on your end). Also, Coinsetter is an US startup that will allow shorting and has a lower amount of counter-party risk, IMO.
- tptacek 13y ago
  What makes you think Coinsetter's counterparty risk is low?
dia80 13y ago
There can be no options since volatility is impossibly high.. lets take an example. You buy an $850 put with the spot price at $850 and it expiries in 6 months. 90 day realized volatility has been 130% annualized so the black-scholes formula says i have to charge you $300 usd for that option. You make money if BTC is $550 or below in 6 months. Your upside is $550 if it goes to 0 and down side is $300 usd. Still want to trade?
- tedunangst 13y ago
  I suspect you could find people willing to sell that put for less than $300. If there's no action at $300, somebody will step in at $200, or $100, or $10. Remember that Bitcoin can only go up, so there's no risk. It's like free money, you just have to be willing to accept a little less free money than the rest of market to get yours.

muyuu 13y ago

Looks like a great way to get swiped out.

pla3rhat3r 13y ago

Great article. I saw no reason to keep reading after "You bet. But it's an expensive trade. And even if you're right, you won't walk away with much, if anything." I wish more articles would be more upfront so I wouldn't have to waste time reading them.

LogicalBorg 13y ago
Funny! Try skipping to the concluding sentence or paragraph. Or just reading the first sentence out of each paragraph. That's how I skim the long, boring stuff.

alexeisadeski3 13y ago

There isn't a BitCoin ETF yet??

prodigal_erik 13y ago
Storing and guarding gold is a pain in the ass. Transaction fees for tiny positions in the entire Russell 2000 index would be prohibitive. These are the kinds of things people use ETFs to buy. Why would I want to buy into an ETF that holds BTC rather than buying BTC myself, is it easier to write options or loan into short interest that way?
- alexeisadeski3 13y ago
  >Why would I want to buy into an ETF that holds BTC rather than buying BTC myself, is it easier to write options or loan into short interest that way? Yes it would be easier. Also, it'd be much easier to grab a BTC ETF on e*trade than to deal with the BTC exchanges.